Monday, May 12, 2014

1.The City’s hourly (or unit) labor costs have been growing faster than the City’s revenues have been growing for many years. Do you believe that is sustainable?

2.If you think the growing unit cost of labor is unsustainable, what reforms, if any, to the City’s labor contracts would you suggest the next City Council pursue to make these costs sustainable?

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Daniel Parrella:

1. No, whenever you have costs increasing faster than revenues that is inherently unsustainable. The growing employer's share of CalPERS in particular is daunting and represents a significant chunk of rising costs.

2. I would like to continue to build on the successes of the last labor negotiations. We have a few options moving forward. For starters all the employee groups should pay what the Davis Police Officers Association pays. They are the only group that pays both 9% employee share of CalPERS as well as 3% of the employer's share of CalPERS. We could also cut down on the Cafeteria Cash-Out Plan, It is currently at $500 and could be lowered to zero. Asking our employees to pick up a bigger tab of the employer's share, boosting it from 3% to say 5%, would also save a tremendous amount of money in the long run.

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Sheila Allen:

The growing cost of pensions and health benefits for the staff of the City of Davis and other public agencies is a major and legitimate public concern. It is a major contributor to the $5 million structural budget shortfall that the city manager has estimated over the next five years. A major portion of any public entity and most businesses are personnel costs.

However, labor costs are not the only factor that has been growing faster than city revenues in recent years. For example, the cost of materials needed to rebuild our pot-holed city roads have accelerated. And, obviously, water rates will be increasing to pay for the joint project with the City of Woodland that will secure Davis' water future.

In comparing labor costs to revenues, it is important to remember that the country just suffered the greatest recession since the Great Depression, and the recovery has been much slower than past economic recoveries. The City of Davis was not immune from this economic downturn. Also, major state funding sources such as RDA have either dried up or significantly decreased. In addition, insurance costs have also increased. grew faster in recent years than city revenues. But this problem is not unique to Davis. Almost every entity of local government across the state of California has been enduring these difficulties.

2. The situation calls for looking at every part of the budget equation to gets the city's books permanently back into balance. This includes the new revenues from Measure O on the June 3 ballot, which I support. I would look at every important asset in the city's portfolio and examine how it could be used to better the city's financial condition. In addition, economic development will also add to the revenue side of the equation.

And I think the adoption of additional budget efficiencies, including steps to help contain future growth in labor costs, are unavoidable until we are in balance. The city will need to go beyond the $11 million reduction in General Fund costs that have already been implemented by the current City Council in recent years. While funding for public safety is a core service of city government and must always be the city's priority, every sector of city spending deserves a closer look in times like these.

The city has just implemented a new round of contracts and imposed terms on two labor groups that did not reach a new contract with the city that have imposed some significant rollbacks in city compensation. I support adhering to the terms for the life of the contract agreements. Future increases in compensation agreed to in future labor negotiations may need to be accompanied by offsetting concessions that require city staff either to contribute more to the cost of their benefits and-or agree to other changes that enable additional savings to assure a balanced budget and the long term fiscal health of the city.

That said, I am a very strong supporter of the city employees who are being asked to do more with less and to accept these difficult decreases in pay. We must be careful to remember that we operate in a competitive market for city staff. We need to attract, retain and value public servants who will maintain the high quality of city services that Davis residents rightfully insist upon.

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Robb Davis:

I would say they are not sustainable and we can think about this in a number of ways. First, 70% of our General Fund is in Employee Compensation. By my calculations the total GF costs will be growing at about 3.2% per year and revenue at 2.5% over the next 5 years. Given the place of employee compensation in total costs it is clear that we cannot bring the two rates of growth into line without dealing with growing employee compensation. But the prospects for that are dim. Our pension costs are set to double between now and 2020—going up to over $13 million. Further, and this is where the lack of sustainability is clear, even though we have cut 22% of workforce over the past 5 years, pension costs alone next year will be where they were 3 years ago. So we are cutting staff but paying more for that staff. Most of that is in pensions, OPEB and current employee medical care. Finally, even as our “reserve” shrinks to zero over the next year or so, we are still not maintaining streets and other critical infrastructure within our GF budget (the proposed 2014/15 budget has 2 million or so for maintenance but that is a drop in the bucket compared to need). So, we may need to return to citizens for a parcel tax to cover street repairs. THAT demonstrates the lack of sustainability of our budget: if we cannot cover the costs of maintaining current infrastructure with our current revenues but must look to hard-to-achieve tax increases (2/3 vote to pass), we have a problem.

Of course we could deal with this lack of sustainability with rapid revenue growth from sales, property and unsecured property taxes. But I am skeptical that we can grow or maintain growth rates in revenue to fill these holes (and you did not really ask about growing revenue—even though it is a piece of the puzzle).

2.If you think the growing unit cost of labor is unsustainable, what reforms not yet undertaken if any, to the City’s labor contracts would you suggest the next City Council pursue to make these costs sustainable?

My solutions are stated in general terms because I am not sure (yet) where the greatest savings can occur. But we should be willing to do all of the following (and I may be missing some—you will educate me I am sure):

1. We have reduced the cafeteria cash out but could/should we take it to zero? Some cities do not have this and while some argue that by going to zero we may push more people INTO our plan (which would cost us more), I have not seen evidence of that. Cutting the cafeteria cash out to zero should be on the table.

2. We will have to seek greater staff contributions to pensions. This has been done in the past but salary lost to such contributions was “backfilled” by giving salary increases. In the future we must request greater contributions to pensions and NOT backfill.

3. We must freeze all salaries (see previous point) in the next round of negotiations if possible.

4. We should explore graduated salary reductions. By graduated I mean we should ask the highest paid staff to take salary reductions at a higher rate than lower paid staff. We may simply freeze some salaries (I AM talking about salaries here) but have graduated salary cuts above a certain threshold. UC Davis did this a few years back.

5. We should stop closing city offices (using a kind of furlough program) and ask staff to work full time for the same (or less) salary.

6. I think we have gained some cost saving via recent state level decisions about where our medical care is referenced (Sacramento versus Bay Area). We should also examine the possibility of asking for greater employee contributions to current medical care (if possible) and contributions to the retiree portion for beneficiaries (again, if possible—I need to study this more).

7. I am not sure what, if anything, we can do with current retiree medical care but we should examine what is possible to have them contribute more or provide a different coverage.

8. Finally, we should look at the potential for outsourcing at all levels. My only concern about outsourcing is that while it seems like a logical way to cut costs (we could offer contracts to those who pay salaries equal to the city staff’s and decent medical care but save tremendously because of no pension costs), I am concerned about quality of work. This is not a smokescreen but a real concern. Ownership and identification with the goals of the city IS a motivating factor for city staff and if we are going to outsource we need to have in place clear quality assessment guidelines for any outsourced jobs.

We have done some of 8 but perhaps need to be more aggressive in putting all of them on the table. You can correct me where I am wrong here—as I am sure to be. This is a huge and challenging area of learning for me.

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John Munn:

I will start by observing that there are more challenges to the City of Davis budget than unit labor costs alone. I have not tried to separate unit labor cost out before, so you are going to get my initial thoughts that sometimes need to be corrected, which I expect but can be more painful in a public arena. I can also note with certainty that, having followed your columns, you already know a lot more about this than you will get from me.

I have commented elsewhere about the apparent lack of control over providing city services that comes from relying on attrition to reduce the number of city employees, and that total payroll has increased despite the reduction in number of employees. Increasing unit labor costs resulting from higher health care coverage and pension charges helps explain why the City’s budget has grown while number of employees has gone down. Rising payroll while the number of employees has been reduced by over 20 percent could also result from loss of lower paid workers, who actually provide services, while increasing the number of higher paid management employees. At his point, I don’t have information needed to know the relative importance of these possibilities in creating our current labor cost problems. Also, I want it to be clear that I consider total employee compensation to include both what is paid directly to an employee (including deducted amounts) and what is contributed by the employer to pay for benefits (some of which may be an unfunded future benefit). With that background, I will go on to try to answer your question.

Unit labor cost increases, alone, might not be the only reason for our current City budget deficit. But they must be a big part since, without raises, fewer employees should mean lower overall costs. However, having fewer employees might also pencil out to a lower overall cost of pension and health care costs depending on how the city contributions to pensions and health care are calculated for different employment classes (for example, is the health care cost of an employee tied to salary or not) and on the recent “give-backs” in employee bargaining agreements. This would need to be compared to increased health care system and pension system costs to know for sure, and I would work with City staff to produce that information.

With or without the complications noted above, and even without raises, there will be future increases in pension compensation because of staged increases in CalPERS rates and likely growth in health care premiums. So the City’s share of unit labor costs must be brought under control or they will inevitably grow to be larger than the general fund. This is obviously not sustainable.

In addition, total employee compensation is still adding to our unfunded liabilities. I have seen estimates of unfunded compensation liabilities of $15 million for pensions and nearly $60 million for health care. These are really big numbers, but I also know that they can grow or shrink based on assumptions about investment returns and rates of increasing cost that are subject to change.

Rich Rifkin Question 2: If you think the growing unit cost of labor is unsustainable, what reforms not yet undertaken, if any, to the City’s labor contracts would you suggest the next City Council pursue to make these costs sustainable?

John Munn Response:

From the information I have seen so far, paying for growth of unit labor costs without large, and probably unacceptable, local tax increases or other large sources of new revenue requires that employees pay a greater share of the cost for pension and health care benefits that are made available to them through City employment. Another approach to reducing the growth of unit labor costs is to create tiered systems, where reduced benefit packages are offered to new employees. However, I still want to see the assumptions and calculations before stating conclusions about how the City Council should deal with these costs.

Opportunities for collecting more City revenue from new sources, in addition to sales and parcel taxes, such as from business park property taxes and business-to-business sales, would also help to support growing employee costs. But the net City revenue increases that can be realistically produced from innovation parks and other business growth still need to be determined. This does not mean that business parks do not provide benefits, some of which have revenue spin-offs, such as local jobs. Hotel occupancy taxes are another potential source of new revenue.

Labor cost is a major part of the City budget, and my approach to balancing the budget is to go through a review process to identify available revenues and then match revenue to spending, including the cost of future unfunded needs such as pensions, health care, and street maintenance and repair. Then the holes between revenue and spending can be seen and a discussion about how or whether to fill them can take place. This is needed to gain the public’s trust in decisions made by the City Council, particularly about taxes and cuts. And City employees must also participate in this process so that they can see what measures are needed to maintain their benefits in the long term.

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Rochelle Swanson:

As a sitting elected, it is inappropriate for me to give specific answers on specific items on labor contracts — especially when (we) have a couple not formally agreed to, but imposed. I think my record is strong on taking tough votes on getting our budget in better shape.

I can tell you that I will continue to support the use of a hired outside negotiator, which Joe (Krovoza) and I championed. And no, growing costs without matching revenues is not sustainable.